The European Central Bank’s announcementlast week that it would buy unlimited amounts of 3-year government bonds from countries that ask for help from the eurozone’s rescue funds – the EFSF and the ESM – sent emerging marketsand especially Central and Eastern European ones higher.
A decision by the German constitutional court on Wednesday to allow Germany to join the European Stability Mechanism (ESM) breathed even more life in the markets, with CEE again benefiting from the good news for its main trading partner, the eurozone.
“The action has been very positive for Europe overall, the reactions in the markets are strong, very strong and positive,” Andreas Treichl, chief executive officer of Erste Group Bank, told Emerging Markets in an interview.
“I think that these have been so far probably the most decisive measures taken and of course they also have a positive effect on Central and Eastern Europe,” he added.
Frank Oland Hansen, a senior economist at Danske bank, said the German court’s ruling could be “a turning point for the debt crisis.”
“The ESM and the ECB’s Outright Monetary Transactions (OMT) are seen as a reliable and sufficient safety net. If investors see no need to test the safety net, the ECB may never even have to activate the OMT program,” Hansen wrote in a market note.
Treichl believes it is now up to the troubled eurozone members to take the necessary steps to reduce their debt burdens and generate growth. “I think it’s showdown time now, because there is not much more that the ECB can do to help,” he said.
“I think that the ECB has now exhausted most of the resources it has to act alone, now it’s up to the respective states to act and to make use of it. And that remains to be proven,” Treichl added.
It could be months before the support from the ECB actually materializes and even then, bond purchases “will do no more than buy time,” Capital Economics senior European economist Jennifer McKeown wrote in a market note.
WORST OVER FOR SOME IN CEE
The outlook for Central and Eastern Europe “depends on the general growth prospects all around the world, not only in Europe” but some countries in the region fare much better than others, Treichl said.
“I think that for those countries in Central and Eastern Europe that have a good overall and government debt situation and a good liquidity situation, the likelihood is that for those countries the worst is over, I would say that,” Treichl said.
“Which does not mean that it’s good,” he added. “It’s bad enough for the moment but I think for many countries in Central and Eastern Europe the situation and the outlook is substantially more prosperous than for many countries in Western Europe.”
The ECB’s promise to buy bonds and the German court’s decision on the ESM are also the first steps in a series of reforms meant to bring closer integration within the eurozone, after more and more critics said the single currency area will not be able to remain intact without fiscal and banking union.
On Wednesday, European Commission President Jose Manuel Barroso presented legislative proposals to the European Parliament to create a single European supervisory mechanism, with the ECB having a central role in the surveillance of banks in the eurozone.
Treichl said the concept of a banking union was “a good one” but that more details were needed about what would it include, such as whether there will be a common deposit insurance scheme and whether all banks will be part of the scheme or only the systemically important ones, what will happen with the countries that are EU members but not in the eurozone or what will the transfer of authority from local regulators to the ECB will actually mean.
“There are still a lot of details to be discussed,” Treichl, who has emphasized that a banking union must follow a fiscal union in the single currency area, said.